Why Delaware?

As a non-lawyer I’ve wondered why so many companies – regardless of where they do business or actually are located – incorporate in Delaware.

The little state that is barely a whistle-toot on a fast New York-to-Washington train ride practically makes an industry of playing host to corporations. More than 850,000 companies make their home there, including the majority of US publicly traded companies, according to the Delaware Division of Corporations.

The Court of Chancery – and the Delaware Corporation Law it interprets – have a lot to do with why lawyers tell companies to incorporate there. Delaware law gives flexibility to companies in governance matters, and the court itself has a long history of case law on issues like fiduciary responsibilities of directors.

What’s more, the judges (a chancellor and four vice-chancellors) on the Court of Chancery specialize full-time in corporate matters. And they decide the cases, with no jury trials. Chandler explains:

The reason Delaware is viewed as the center of the universe for corporate law is that a defendant (or a plaintiff) can be guaranteed—no matter which judge you get—to have a jurist acutely familiar with this body of law; a judge who works with corporate law issues day in and day out, seven days a week. That’s the uniqueness of the Court of Chancery.

Contrast that with, say, Texas or California: A complex shareholder lawsuit may be presided over by a judge with more experience in bank robbery or debt collection cases than corporate law – and it may be decided by a jury of folks who, well, aren’t really the peers of the CEO, members of the Board of Directors or the shareholders.

I’m sure I’ve oversimplified. But if you’re curious, have a look at your 10-K or your client’s and see where the company is incorporated. Then ask a lawyer why.